Are You Planning Your Commercial Real Estate Taxes?
Here is the second installment in our series focused on tax planning. Throughout September and into October, we're going to look at areas where, in conjunction with your tax advisor, you can take proactive steps as an individual or as a business owner to minimize your tax liability.
It’s never too early to think about the tax consequences of decisions you make while building your commercial real estate (CRE) empire. After all, the money you stick in your pocket is what’s left after you hand Uncle Sam his share. You’ll profit more and stress less if you spend time planning how to use the U.S. tax code to your advantage. Here are some tips.
The government gives you many ways to help the environment and your bank account, too. Commercial real estate investors may be able to deduct energy-efficient improvements of lighting, heating, and HVAC systems, to name a few.
Any improvements to your property can be depreciated over a set schedule. If you improve a structural component, like add square footage, you can depreciate costs over 39 tax years; if you add removable property, like new laptops, you generally can depreciate it over 5 to 7 years. (Always check with a professional, however, as depreciation schedules can be particularly complicated.)
Charity Starts at the Office
If more than a kind heart is behind your contribution of land to your county, city, or state, then you may not get the tax break you hoped for. The Internal Revenue Service (IRS) can put a lid on charitable deductions if it determines that you receive a benefit from the contribution. If you’re making a contribution to reap tax rewards, check with an accounting professional to ensure that the donation truly qualifies for a tax break.
What’s in a name? A lot of tax consequences if the name is “dealer” or “investor.” Basically, if you call yourself a dealer, then earnings are taxed as ordinary income or loss. If you’re a real estate investor, however, then earnings are considered capital gains or losses, and as a result, are taxed at a lower rate. But don’t automatically think that it’s better to be a real estate investor than a dealer. Sometimes, dealers may use a loss to offset other pots of ordinary income. This is a great topic to discuss with a qualified tax professional.
Breaking Up Is Hard to Do
If you buy a chunk of land just to break it up and sell parcels over time, you must allocate the total cost to each parcel. It’s harder to do than you may think. The timing of deferring or realizing gain from dividing property can be especially tricky. And, like so many tax issues connected with commercial real estate, advice from a tax professional is valuable.
Give us a call today. We’ll help you structure your business and tax profile to take advantage of every break contained in the IRS code.